NY income tax hike may hurt NJ tax collections

NEW YORK (Reuters) – New York state's income tax hike on wealthy taxpayers may have caused a surprising drop in neighboring New Jersey's tax collections, a New Jersey budget expert said on Tuesday.

New Jersey residents who work in New York get credits on tax bills for the income tax payments they owe New York.

Last year, the Empire State raised the tax rate for annual income above $300,000 to 7.85 percent and for annual income above $500,000 a year to 8.97 percent.

But New York used a "recapture" provision -- which was obscured by New York officials and missed by tax experts -- to instead tax the entire income of these wealthy individuals at the two higher rates, according to written testimony by David Rosen, New Jersey legislative budget and financial officer.

More than 20,000 New Jerseyans have annual incomes that top $500,000 a year and the state had estimated New York's higher income tax rates would cost it $300 million in the fiscal year that ends on June 30.

But thanks to the recapture provision, that estimate might have been off by $200 million, said Rosen.

And even more tax revenue could be siphoned to New York because it also raised rates on the many New Jerseyans who earn at least $300,000 a year, he said.

Rosen predicted that the state will have to find an extra $767 million to balance its budget over the next 13 months. The testimony appears on the web site: http://www.njleg.state.nj.us/legislativepub/budget_2011/Rosen_testimony_05252010.pdf.

Separately, New Jersey Governor Chris Christie, addressing think tank the Manhattan Institute in New York on Tuesday, called on unions to make sacrifices to help the state close an $11 billion deficit for fiscal 2011.

"If we continue to allow a minority group of union leaders to define for us our standard of living, then we are bound to be Greece, we are bound to bury our children under a mound of taxes and debt," he said.

Only last week, Christie, a Republican, vetoed the Democratic-controlled legislature's income tax increase for million1aires.

Christie warned the legislature, which is facing November elections, against rejecting his budget remedies, which include asking voters to cap local spending increases at 2.5 percent a year.

The governor would impose the same limit on the state's discretionary spending, a category that excludes debt service or federally required programs.

"If you don't listen to the people of New Jersey, the people of New Jersey will show you another way to make a living," he said.